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Did Fair-Value Accounting Contribute to the Financial Crisis?


Christian Laux


Vienna University of Economics and Business Administration

Christian Leuz


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

October 12, 2009

Chicago Booth Research Paper 09-38
ECGI - Finance Working Paper No. 266/2009
Journal of Economic Perspectives, Forthcoming

Abstract:     
The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting added to the severity of the 2008 financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. We also find little support for claims that fair-value accounting leads to excessive writedowns of banks’ assets. If anything, empirical evidence to date points in the opposite direction, that is, towards overvaluation of bank assets.

Number of Pages in PDF File: 48

Keywords: Mark-to-market accounting, Financial institutions, Liquidity, Financial crisis, Banks, Financial regulation, Procyclicality, Contagion

JEL Classification: G14, G15, G30, K22, M41, M42

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Date posted: October 15, 2009 ; Last revised: December 15, 2009

Suggested Citation

Laux, Christian and Leuz, Christian, Did Fair-Value Accounting Contribute to the Financial Crisis? (October 12, 2009). Chicago Booth Research Paper 09-38; ECGI - Finance Working Paper No. 266/2009; Journal of Economic Perspectives, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1487905 or http://dx.doi.org/10.2139/ssrn.1487905

Contact Information

Christian Laux
Vienna University of Economics and Business Administration ( email )
Welthandelsplatz 1
Vienna, Wien 1020
Austria
Christian Leuz (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1996 (Phone)
HOME PAGE: http://chicagobooth.edu/fac/christian.leuz
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://www.nber.org
European Corporate Governance Institute (ECGI)
Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Center for Financial Studies (CFS) ( email )
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany
University of Pennsylvania - Wharton Financial Institutions Center
3641 Locust Walk
Philadelphia, PA 19104-6218
United States
CESifo Research Network
Poschinger Str. 5
Munich, DE-81679
Germany
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